Twelve Tips for Interpreting Accounts
Looking at a set of annual accounts or monthly management accounts can be a minefield if you don’t know what you’re looking for.

The Annual Report & Financial Statements include:

1.      The trustees’ report which includes the activities and achievements over the last year. This is always worth reading as it should tell the story of the last year

2.      The income and expenditure account or profit and loss account or the statement of financial activity (SOFA) in the UK and statement of financial performance in New Zealand for a charity tells the story (or video) of income and expenditure, illustrating the organisation’s activities over a period of time, usually 12 months.

3.      The balance sheet (UK) or statement of financial position (NZ) is a snapshot (photograph) of the organisation’s assets and liabilities at a particular point in time, ie how much is it worth. This is often the last day of the financial year.

4.      In New Zealand a statement of service performance has also been introduced for small charities and is being introduced for larger charities by 2020.

 

On monthly management accounts it may be helpful for the finance team to colour code the most important figures eg using Red, Orange, Yellow , Green, Blue, Indigo, Violet (for those who know Richard Of York Gained Battle In Vain as an acronym of the rainbow colours). It’s also useful to be provided with some brief and simple key points of analysis.

 

Key questions about income and expenditure

  1. Is there a surplus/profit or deficit/loss for the year/year to date?

  2. How does actual income compare to budget and to the comparable period last year?

  3. What are the key income variances and why?

  4. How does actual expenditure compare to budget and to the comparable period last year?

  5. What are the key expenditure variances and why?

  6. What is the latest forecast for the full year?

 

Key questions about the balance sheet/statement of financial position

  1. What’s the total value of funds?

  2. What’s the split between restricted and unrestricted funds and what is the level of the general reserve?

  3. What is being done to address any shortfall in reserves?

  4. How much cash is there? Is this sufficient to run the charity?

  5. Are there net current assets or net current liabilities (the latter is not healthy, likely to mean running on loans)?

  6. How sustainable is the organisation over the medium term?

 

Signposts

 

Author & copyright: Helen Calder 2019

Peer reviewed by Kent Beasley